Overview - Three Primary Factors

We have created the Wegener, LLC Blog to give updates and insight into our Adaptive Management Approach. We plan on giving our current ideal market exposure and updating any changes on a weekly basis. 

We believe that the stock market is influenced by three primary groups of factors: Long Term Reversal Factors, Intermediate Term Trend Factors, and Short Term Reversal Factors.

• Long Term Reversal Factors are primarily tied to the ratio of current price to the present value of future cash flows. We believe these Factors can be used to measure investors' risk tolerance for the stock market. When investors' risk tolerance is low, we believes there is significant potential for it to increase. When risk tolerance increases, we believes stock prices typically appreciate at an above average rate.
• Intermediate Term Trend Factors for the stock market are tied to price trends in a wide variety of security types and groups, including sector indexes, small capitalization stocks, large capitalization stocks, corporate bonds, government bonds. We believe these Factors estimate the current direction of change in investors’ risk tolerance for the stock market. Intermediate describes the average length of time historically for the Factors to go from positive to negative, or negative to positive.
• Short Term Reversal Factors are related to recent movement in the overall market compared to typical changes in the market over similar time periods. The investment manager believes these Factors are important because they measure short term overreactions that are usually corrected over a short period of time.

When the combined Factors of the stock market as a whole lead us to expect a poor reward for the risk taken we keep a low ideal stock market exposure. When the combined Factors of the stock market lead us to expect a positive reward for the risk taken we maintain a high ideal stock market exposure.

Currently our Long Term Reversal Factors are negative. Based on this we believe the stock market, based on the S&P 500, will underperform Treasury Bills over a long period, such as 5-10 years. Our Intermediate Term Trend Factors are also negative.

The selling from July and August created positive Short Term Reversal Factors. Those couldn't be acted upon at the time because our Long Term Reversal Factors being negative mitigates any positive influence on our expected stock return.

However, our Short Term Trend Factors, which we typically don't discuss because they influences our market exposure relatively infrequently, turned positive by late August. That created a market environment, in combination with the positive Short Term Reversal Factors, where we have been able to take a modest stock market exposure. Returns historically have been volatile and the recent period so far as been no exception. Past examples are the periods following market lows in the Fall of 1998 and the Fall of 2001. The short term nature of this market environment means it is also common for changes to negative to happen abruptly.

Our Intermediate Term Bond Trend Models being negative does reduce the average expected return we expect from our positive Short Term Stock Market Trend Factors. However, there still exists enough of a worthwhile reward/risk tradeoff to maintain a modest stock market exposure.

Our current ideal stock market exposure is 20%.